Recognizing and reporting revenue are critical and complex problems for accountants. There are many gray areas in both recognition and reporting, but ultimately all earned income from sales transactions falls into gross or net categories. When gross revenue is recorded, all of the income from a sale is accounted for on the income statement. Net revenue is usually reported when there is a commission that needs to be recognized and/or when a supplier receives some of the sales revenue.
Gross revenue reporting separates sales and cost of goods sold. Net revenue reporting only lists a "net revenues" item, calculated by subtracting cost of goods sold from gross revenue. Standard gross versus net revenue reporting guidelines under generally accepted accounting principles, or GAAP, were addressed by the Emerging Issues Task Force, or EITF 99-19.
Primary Obligor and Revenue Reporting
In an accounting sense, an obligor is a company or individual who is responsible for the provision of a saleable product or service. The designation of a primary obligor is crucial to revenue reporting. The following are a couple of examples:
Company A manufactures wrenches. It controls the production costs, assumes the inventory and the credit risk in its operations, is able to choose its suppliers and set prices. Given these variables, Company A is clearly the primary obligor and reports any income from the sales of its wrenches as gross.
Company B is an Internet store that presents different suppliers' goods to potential customers, and the Company B website has a disclaimer that it is not responsible for the shipping or quality of the products received by customers. In this case, Company B is not the primary obligor and likely reports any revenue as net.